We were going to lead today on the sale of PIA, and in that feature we were going to make mention of missile attack risk, but now we are left wondering if there is some sort of conspiracy going on against MAS? I would forgive anyone at MAS for thinking these thoughts out-loud at this time – you could not make this stuff up could you? MAS has seen its shares fall by over 18% over the past 12 hours as the airline comes to terms with the loss of two more or less full 777s in under six months with both aircraft losses seemingly having nothing at all to do with technical malfunction – this is unheard of save for 9/11.
At the same time as the MAS disaster, leaders of the pro-Russian Donetsk People’s Republic rebels went to Twitter saying that they had just shot down a Ukrainian transport plane with an SA-11 ground-to-air missile. No transport aircraft was lost yesterday.The real story here, aside from the grief of those with loved ones on the aircraft, is one of insurance risk. It is highly likely that this may be classed as an act of war, in which case it may well not be insured; but even if it is, who does a company litigate against – a bunch of rebels? On top of this, we have to remember not only the cost of the lost aircraft but the liability payments that may or may not be made to relatives, the cost of payments to the families of crew and the cost of special flights, and the lost revenue on the routes operated by this 777. We put the cost in lost revenue, damages and loss of asset at around just under $400m, this does not take into account reputational impact that may or may-not hit passenger demand for MAS flights. In any event this, like the MH370 loss, will be a long drawn-out claim that will not be resolved within a six-month window and that leaves MAS out on a limb. One hopes that the insurance companies will take-on the bulk of this loss eventually but if it is confirmed that a surface-to-air missile brought down flight MH17 then matters will turn to trying to litigate against those responsible which will most likely be to litigate against those who supplied the weaponry – it is at this point that it becomes a significant political matter of global interest.For MAS and other airlines, which today we can call the lucky ones given that most majors were on the same flight path yesterday, the new reality is that all aircraft will now have to divert around the northern area of Ukraine.
I would also argue that insurance companies will start to demand that aircraft should also now be diverted away from flying over other combat zones in the Middle East and that means Iraq, Syria and Israel. If you look at the major routes from Europe to the Middle Eastern hubs and onward to the APAC region then you can see that these combat zones taken together form a very large barrier for all established flight paths as they exist today.Today we are in a situation of increased fuel burn and flight times for all aircraft travelling to and from Europe to the Middle East and APAC regions. If it is a missile strike and demands are made to block flights over all active combat zones, then we will be talking about a very serious game-changing shift of schedules, trip distances and fuel requirements for a large number of flights. This entire situation has the potential to hit the Middle East majors the most, but we must hope that it does not come to that. For now, aside from the regulators, the power lies in the hands of the insurance underwriters as they ponder the risk factors involved, and the fact that Syrian rebels, ISIS and others seemingly have captured Russian and US missiles while Ukrainian separatists clearly have Russian surface-to-air missiles either captured from Ukrainian depots or sent over the border from Russia; and between the lot of them they have no real clue as to how the most sophisticated and effective equipment works – other than how to press the fire button and aim in the general direction of the sky.Traders have reacted to the news by selling off stocks, especially of airlines with Air France-KLM closing down 1.5%, and Lufthansa finishing the day 2.4% lower.
What this will do to MAS, only time will tell, but I think it is time for the Malaysian government to come out in full support of its airline and offer, if required, financial support – After all every other government seems to give their flag carriers financial and regulatory support when they are run badly. MAS is a very badly-run airline suffering from a terrible turn of luck that is totally out of their hands that no airline has suffered since 9/11. It is time the industry rallied around MAS.
Our thoughts and prayers go out to the families of those lost on flight MH17.
Posted by permission